Introduction

In the case of Re Chong Hing Bank Limited [2021] HKCFI 3091, which concerns the interpretation of Rule 2.10 of the Code on Takeovers and Mergers (the “Takeovers Code”) and whether the concert parties of an offeror are prohibited from voting at a court meeting of the privatisation scheme shareholders, the Court of First Instance (the “Court”) held that the concert parties are not entitled to attend and vote in a meeting of the holders of disinterested shares.

Background

Chong Hing Bank Limited (“Company”) is a company listed on the Main Board of The Stock Exchange of Hong Kong Limited (the “Stock Exchange”). In May 2021, Yue Xiu Enterprises (Holdings) Limited (the “Offeror”) requested the board of directors of the Company to put forward a proposal for the privatization of the Company by way of a scheme of arrangement pursuant to sections 673 and 674 of the Companies Ordinance (Cap. 622) (“CO”) (the “Scheme”) and withdrawal of the listing of the shares on the Stock Exchange. Yuexiu Financial Holdings Limited (the “SPV Entity”), a wholly owned subsidiary of the Offeror, held 74.97% of the issued shares in the Company. Around 25% of the issued shares in the Company are held by parties acting in concert with the SPV Entity (the “Concert Parties”) and around 16% of issued shares are held by other shareholders (the “Independent Shareholders”). In the court meeting in August 2021, the Concert Parties were excluded from attending and voting.

Relevant provisions

Where a scheme, such as that in the present case, involves a general offer of a takeover offer, section 674(2)(a) of the CO requires 75% of the voting rights of the members present and voting at the court meeting agree to the scheme, and that the votes cast against the scheme at the meeting do not exceed 10% of the voting rights attached to all disinterested shares in the company. In this case, the “disinterested shares” are those held by the Independent Shareholders. 

Rule 2.10 of the Takeovers Code provides that:

“Except with the consent of the Executive, where any person seeks to use a scheme of arrangement or capital reorganisation to acquire or privatise a company, the scheme or capital reorganisation may only be implemented if, in addition to satisfying any voting requirements imposed by law:－

(a)      the scheme or the capital reorganization is approved by at least 75% of the votes attaching to the disinterested shares that are cast either in person or by proxy at a duly convened meeting of the holders of the disinterested shares; and

(b)     the number of votes cast against the resolution to approve the scheme or the capital reorganisation at such meeting is not more than 10% of the votes attaching to all disinterested shares.”

Rulings in the Court of First Instance

Previously, Re Cosmos Machinery Enterprises Ltd [2021] HKCFI 2088 suggests that concert parties are allowed to vote in a scheme meeting but should be disregarded for vote counting purpose.

However, the Court held that the view that Rule 2.10 prohibits the Concert Parties from attending and voting (the “Prohibition View”) at a meeting of holders of disinterested shares is more consistent with the natural and ordinary meanings of Rule 2.10 and s.674(2) of the CO for the following reasons:

(a)    Prohibition View is more consistent with the language of Rule 2.10. Rule 2.10 clearly mandates a meeting (a) constituted only by holders of disinterested shares, and (b) at which only holders of disinterested shares are entitled to attend and vote.

(b)    Prohibition View is more consistent with the draft history of Rule 2.10. The former Rule 2.10 provided that the scheme needs to be approved “by a majority in number representing 90% in value of those shares that are voted either in person or by proxy at a duly convened general meeting by shareholders other than the persons seeking to privatize the company and persons acting in concert with him”. The change in wording in the amendment embodies a plain intention that Rule 2.10 was intended to be prohibitory in nature.

(c)     Prohibition View is more consistent with other rules in the Takeovers Code. Rule 2.2 and Rule 2.10 shares similar policy concerns on protecting minority shareholders. As Rule 2.2 expressly prohibits voting by concert parties, there is no reason why Rule 2.10 should be construed differently compared to Rule 2.2.

In the present case, the Concert Parties gave an undertaking not to vote at the court meeting and indeed had not attend nor vote at the said meeting. As such, the Court was of the view that Rule 2.10 of the Takeovers Code and section 674(2)(a) of the CO were complied with and hence the court meeting was duly convened. 

Takeaway

This case clarified the position of Rule 2.10 and provided practical guidance to companies seeking to go private. Companies are advised to seek undertakings from any concert scheme shareholders not to attend or vote at a meeting of the holders of disinterested shares prior to the holding of the meeting in order to avoid any glitches in its privatisation procedures.